Growth & Jobs | Using your home equity to kickstart a business

Many people who want to start their own businesses do so for various reasons. For some, it is to achieve independence and become their own boss or simply to enjoy the convenience of working flexible hours while challenging themselves to achieve a successful business. Yet for others, the desire to own a business emerges from their ambition to make a livelihood from a skill or hobby, something for which they have a natural knack.

Although several persons have successfully achieved their dreams of entrepreneurship, many have not. This is often due to major inhibiting factors such as lack of capital based on their inability to borrow from traditional financing sources, a lack of adequate savings, or investment instruments.

On the other hand, those businesses that manage to get off the ground are sometimes stifled by a lack of sufficient working capital, which, in turn, hinders production and expansion of the business. To circumvent those issues, many homeowners are increasingly tapping into home-equity loans to achieve their entrepreneurial dreams.

Two years ago, Moneyed Martin, a car dealer, opted to use the equity in his home to purchase a property with a few shops, which he rents. He said that he was quite pleased when he became aware that he could use the equity in his home to finance this undertaking.

“It was through a friend that I learned about home equity. He used a home-equity loan to start a business, and, therefore, he explained it to me.”

Having taken out the loan, Martin has no reservations. “I would do it again,” he declared.

Petal James, head of mobile sales at JN Bank, explains that a home-equity loan allows homeowners to access funds using their home as the collateral to secure the loan.

“Home equity is simply that portion of your property which you truly own after deducting or paying down the outstanding mortgage, which remains,” she pointed out.

“For example, let’s say you applied for a mortgage of $2 million to purchase a home for $2.8 million dollars 15 years ago. Depending on a number of factors, such as the neighbourhood where the house is located, if the house is well maintained, has an attractive landscape, or has amenities such as a solar water heater or an automatic gate opener, the value of that home could have appreciated over the years,” she explained.

“The home could perhaps now have a value of some $18 million. The equity in the home is the present value minus the outstanding loan balance. If the loan balance on the house is, say, $600,000, the equity would be $18 million minus the $600,000, which would be $17,400,000. That sum would be the true equity accessible for a loan,” the mortgage expert explained, adding that, “at JN Bank, home-equity loans are capped at a certain per cent of the current property value.”

James further stated that a home-equity loan is usually more appealing to homeowners who want to operate a business rather than other types of loans.

“A home-equity loan does not carry the amount of restrictions as other loans, therefore, an entrepreneur can use the loan how he or she sees fit whereas a business loan would require strict adherence to how it is used,” she explained.

“At the same time, using your property as security makes it a low-risk type of loan as you wouldn’t want to jeopardise the investment in your home. Therefore, it becomes onerous on the borrower to ensure that the equity loan is repaid. It is also a secured way of expanding your business rather than getting an unsecured loan at a higher interest rate. Besides, you get a longer time to repay and more flexibility to manage your cash flow on a long-term mortgage,” she related.

Apart from using a home-equity loan to start or expand a business, James stated that this kind of loan could also be used for other purposes. These include debt consolidation, home repairs, to purchase another property, or for medical and educational purposes.

James further pointed out that while home equity is a valuable asset to homeowners, as with other loans, wisdom should be exercised.

“Repaying your loan on time, monthly, is important so that you do not end up in arrears. We understand that things do happen, for which you may have no control. However, regardless of the situation, we always urge persons to come in and talk with a JN representative the moment they encounter any repayment difficulties.”